Nathan Moser, Managing Director and Senior Portfolio Manager at Impax Asset Management, sees macroeconomic conditions developing that will likely lead to stronger returns for small-cap stocks.
As a portfolio manager, Moser’s goal is to provide clients with a lower-risk way to access the innovation and growth potential of the US small-cap asset class. Moser states that the Russell 2000 index can be a difficult index at times for active managers, as it’s filled with lower-quality companies that many portfolio managers tend to avoid. Since the recent market low in April of 2025, the index has surged based on investor optimism for lower-quality companies, including those related to artificial intelligence, quantum computing, and bitcoin. Portfolio managers owning higher-quality small-caps may have found it difficult to beat the index, driven by narrow sector trends and surging investor optimism. Moser notes that a rally in lower-quality stocks tends to be short-lived, historically transitioning to leadership of higher-quality stocks after 6 to 9 months. A transition to higher-quality stocks may give active managers an advantage over passive index fund investments. Even after this year’s strong performance, the market capitalization of the entire Russell 2000 index is less than $4 trillion, smaller than the value of Nvidia, and comparable in value to Microsoft and other Magnificent Seven stocks that have driven performance in the large-cap market in recent years.
Moser’s view of a comeback in small-cap performance is rooted in three macroeconomic developments.
First, falling interest rates. As the Federal Reserve’s rate-cutting campaign is likely to accelerate U.S. economic growth in 2026. Smaller companies are likely to disproportionally benefit from lower rates, as they tend to be more indebted and exposed to variable-rate debt.
Second, U.S. economic growth. The U.S. economy is likely to grow in 2026, due to improving consumer and corporate confidence resulting from monetary policy and fiscal stimulus from lower tax rates. Fiscal policy provides incentives for companies to increase capital expenditures, which increases economic growth. In addition to their interest rate sensitivity, small caps tend to be more cyclical, meaning that their fortunes are likely to accelerate along with U.S. GDP growth next year.
Third, mergers and acquisitions activity. 2026 is also likely to experience greater activity in mergers and acquisitions, which favors small-cap stocks. The merger market benefits from lower rates, tight credit spreads, strong availability of credit, and changes in regulatory standards that can ease the approval process for mergers and acquisitions. Moser states that the sectors that may benefit most from merger activity include banks, healthcare —specifically biotech — and innovative industrial and technology companies. The IPO (Initial Public Offering1) market has been muted in recent years, as some high-profile businesses have chosen to remain private. Moser notes that concerns about companies staying private longer may be overstated, which could pave the way for a pickup in IPO activity.
As the performance of large-cap stocks has strengthened in recent years, small-cap stock valuations have improved in relative terms. With small-cap stocks being cheap relative to large-cap stocks and multiple stimulative factors impacting the sector simultaneously, investor sentiment and returns are positive preconditions for more durable small-cap performance. Moser states that small-cap performance cycles tend to last many years, sometimes a decade or longer. Small-caps have underperformed for that long in the recent cycle, giving hope for a longer-term performance upswing.
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Risks: Equity investments are subject to market fluctuations, the fund’s share price can fall because of weakness in the broad market, a particular industry, or specific holdings. Funds that emphasize investments in smaller companies generally will experience greater price volatility. The Fund is actively managed. The investment techniques and decisions of the investment adviser and the Fund’s portfolio manager(s), including the investment adviser’s assessment of a company’s ESG (Environmental, Social and Governance) profile when selecting investments for the Fund, may not produce the desired results and may adversely impact the Fund’s performance, including relative to other Funds that do not consider ESG factors or come to different conclusions regarding such factors.
Investments involve risk, including potential loss of principal.
1 An Initial Public Offering (IPO) is the process through which a privately owned company offers its shares to the public for the first time. This allows the company to raise equity capital from public investors by listing its shares on a stock exchange. In essence, an IPO transforms a private company into a publicly traded one, enabling it to access a broader pool of capital
The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.
As of September 30, 2025, the top ten holdings of the Impax Small Cap Fund were: Victory Capital Holding, 5.3%; Acadian Asset Management Inc, 5.1%; Ligand Pharmaceuticals, 4.9%; Roivant Sciences Ltd, 3.7%; Planet Fitness Inc – Cl A, 2.8%; Eastern Bankshares Inc, 2.5%; Extreme Networks Inc, 2.4%; US Foods Holding Corp, 2.2%; Ciena Corp, 2.2%; Pacira Biosciences Inc, 2.1%.
Holdings subject to change.
You should always consider Impax Funds’ investment objectives, risks, and charges and expenses carefully before investing. For this and other important information, please visit www.impaxam.com to download a fund prospectus. Please read it carefully before investing.
Impax Funds are distributed by Foreside Financial Services, LLC. Foreside Financial Services, LLC is not affiliated with Impax Asset Management LLC.